Ethanol Giants Struggle To Crack Brazil Market

By ANTONIO REGALADO and GRACE FAN - Wall Street Journal

RIBEIRÃO PRETO, Brazil - Nowadays, plenty of investors want to talk to Cícero Junqueira Franco. Together with two sons and numerous cousins, he controls a great deal of something the world wants: ethanol.

Mr. Junqueira Franco, a founder of Companhia Açucareira Vale do Rosário, a steam-belching mill that crunches sugar cane into sugar and ethanol, has received offers from several suitors. These include a $775 million bid for his company from New York-based commodities giant Bunge Ltd. But Mr. Junqueira Franco, whose family arrived in Brazil in the 1700s and still owns prime tracts of sugar-cane land in São Paulo state, says he'll never sell.

"Why would I?" asks the 75-year-old Mr. Junqueira Franco, his shirt partly untucked and face flushed after a big lunch with his family.

Thanks to high oil prices and worries over global warming, multinational companies are straining to find ways into Brazil's booming market for biofuels - renewable fuels made from crops such as corn and sugar cane. The U.S. and other countries hope to substitute as much as 15% of domestic gasoline for ethanol over the next decade. With ample land, low production costs and ethanol-production experience, Brazil is viewed by many as the country best able to sate world demand.

A clutch of potential investors have descended here, including commodities giants, hedge-funds and energy companies. Even the founders of Google Inc. came to have a look. But the global millions are colliding with an earthy reality: families like Mr. Junqueira Franco's that have controlled Brazil's sugar-cane wealth for decades, even centuries. Many don't want to sell; others are asking sky-high prices for operations riddled with problems.

The standoff is preventing some big foreign players from getting into Brazil's promising ethanol market through acquisitions, forcing them to develop their own projects from scratch. Yet resistance to outsiders could affect how quickly larger amounts of cheap Brazilian ethanol can begin flowing into the world's auto fleet. Big companies, which have better access to credit and capital, could also help consolidate, modernize and expand Brazil's ethanol industry.

Frustrated investors are easy to find. Archer-Daniels-Midland Co., the largest U.S. ethanol producer, has been shopping here for more than three years. Global sugar traders such as Australia's CSR Ltd. and Germany's Südzucker AG have met with high prices and lengthy negotiations. India's largest sugar and ethanol maker, Bajaj Hindusthan Ltd., announced plans a year ago to spend $500 million to acquire mills. After several months of courting mill owners at their expansive ranchlike fazendas, the company has struck out. "I have been to a lot of nice houses," says Prem Bajaj, a Bajaj business-development executive.

Many family-owned mills appear to be troubled. The domestic sugar and ethanol industry is informally managed and highly fragmented, making it less than ideal for outside investment. Often, millers don't have reliable accounting books and are plagued by tax disputes and debt, Mr. Bajaj and other investors say. Such issues can be difficult to resolve in Brazil's slow-moving legal system.

Pitfalls for Outsiders

Labor and environmental pitfalls also loom for outsiders. Most sugar cane is still cut by hand -- grueling work that has enriched mill owners for centuries, but could expose international companies to liabilities. Global bank HSBC Holdings PLC got unwelcome publicity for loans it had made to Pará Pastoril e Agrícola SA, a mill in the state of Pará that was raided by a government antislavery task force earlier this year.

According to Brazil's Ministry of Labor, officials "rescued" 1,108 workers laboring under "degrading" circumstances that included 13-hour work days and poor sanitary conditions. An HSBC spokesman says the bank "is committed to social responsibility," but declined to comment on any specific clients. Officials at the mill, known as Pagrisa, have denied wrongdoing both publicly and on their Web site.

Brazil's millers face some political pressure not to sell. If foreigners or large companies gain leverage, Brazil's traditional sugar-producing regions stand to reap less from an ethanol boom. Aloizio Mercadante, a powerful senator from São Paulo, recently called the action of millers who've sold "incredible and incomprehensible."

Despite the many hurdles, foreign biofuels companies like ADM believe that getting into Brazil is still a must. U.S. corn ethanol, which is less efficient to make, has been competitive with gasoline due to a 51-cent tax credit on each gallon. And both ADM and competitor Cargill Inc. faced narrowing profit margins in their U.S. ethanol operations last year due to leaping corn prices -- a side effect of greater demand for corn from ethanol producers.

By contrast, Brazil's sugarcane ethanol can comfortably compete with costly oil -- even if oil trades in the low-$40-per-barrel range. ADM's CEO Patricia Woertz says she believes Brazilian ethanol operations would provide "an opportunity for profitable growth" regardless of what happens in the U.S. market. Although a stiff import tariff of more than 50 cents per gallon currently makes Brazilian ethanol costly to import to the U.S., Brazilian ethanol could dominate other markets in Asia or Europe.

Analysts say Brazil needs billions of dollars in investment to expand production and to build the pipelines, ports and other infrastructure it needs to become the world's ethanol supplier. There are roughly 210 companies running 368 sugar and ethanol mills. The five largest players generated about 17% of the country's ethanol production last year.

Brazil's ethanol industry is "very disorganized, and consolidation will help," says Clayton Hygino de Miranda, president of the sugar and ethanol division of Brazilian construction conglomerate Odebrecht SA.

In the U.S., where ethanol is made from corn, any company can build a refinery and buy corn on the open market. But because sugar cane's heft makes it costly to transport, and its sucrose content degrades quickly, crops are always planted close to the mills that process them. That makes it difficult to sidestep people like Mr. Junqueira Franco, who owns 3,200 acres of prime plantation land.

Sugar barons' control over the ethanol industry could impede Brazil's effort to create a global market for ethanol. Japan, for instance, has been in talks with Brazil since 2001 to sign a long-term ethanol contract. But the Japanese officials have wavered, expressing concerns as to whether Brazil's sugar families can furnish steady supplies of ethanol. In the 1980s, local producers chasing high sugar prices created an ethanol shortage that left Brazilian drivers of all-ethanol cars without fuel. Having large companies that are focused on ethanol rather than sugar could help prevent supply shocks in the future.


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